Air Conditioning Ruling Puts Freeze on Consumer Buying Power

Published March 1, 2004

On January 13, a federal appeals court overturned a Bush administration rule that would increase energy efficiency standards for central air conditioners and heat pumps by 20 percent. The court ordered the Bush rule be replaced by a proposal from the Clinton administration that would require a 30 percent increase in energy efficiency.

Environmentalists and energy conservation obsessives declared the court’s ruling “a big victory for consumers.” They also declared up is down, black is white, night is day, and pigs really do fly.

Well, actually they didn’t. But they might as well have.

No Victory for Consumers

You don’t have to be some whiz-bang economist or regulatory specialist to laugh-off the claim that consumers “won” when the court decided as it did. All you need is a moment of reflection.

Energy efficiency standards, after all, remove products from the marketplace that are deemed “energy inefficient.” Accordingly, supporters of the decision are literally arguing it’s “a big victory for consumers” when the federal government prevents consumers from buying products they might otherwise wish to buy–and indeed have bought–for their entire lives. Only in Washington can denying consumers choices in the marketplace be deemed “pro-consumer.”

What conservationists really mean is that consumers “won” because, up until now, they were stupidly blowing their money on inefficient air conditioners and heat pumps, unwisely ignoring the more energy-efficient air conditioners and heat pumps that were attracting cobwebs in stores. Now that the courts have stepped in, the conservationists maintain, consumers will be unable to inflict such economic harm upon themselves.

That’s what they actually mean, but it doesn’t sound quite as good when plainly stated, does it?

Nor is it even true. According to the analysis offered by the Clinton administration in support of its proposed standard, the price of the average air conditioner on the market will increase from $332 to $435 … and 40 percent of all consumers will never save enough on their energy bills to offset the higher price attached to the “efficient” air conditioner. So even by the conservationists’ own calculations, 60 percent of consumers arguably may have “won,” but 40 percent most surely “lost.”

Opportunity Costs Abound

But wait, there’s more. Those “winners” will have won only if the net economic savings gained from their forced investment in energy efficiency is greater than the returns that might have been available to them had they put their money in other investments. In other words, just because you save a net of 3 percent a year by buying the energy-efficient air conditioner does not mean you made a good investment. If you could have gotten 7 percent a year by investing in municipal bonds, the federal mandate will have cost you money.

What about those of us who wouldn’t have invested that money in something else? What if the extra $100 would have been blown on dinner and a movie rather than on the energy-efficient air conditioner? Wouldn’t those consumers be economically better off under this rule, and aren’t those consumers the rule rather than the exception?

Perhaps. But what business is it of Congress, the Department of Energy, or the federal appeals court whether I spend $100 for greater energy efficiency in my new air conditioner or $100 on dinner and a movie? And how do they know how I can best spend my money?

The choice is not necessarily, of course, between economic frivolity and imposed eat-your-spinach-economics courtesy of the federal government. In my family’s case, dollars that don’t go to living expenses or the 401k go to my son’s college fund–the entertainment budget is limited. So if I were in the market for an air conditioner or heat pump, the feds are essentially telling me I’m better off investing in a more efficient appliance than in my son’s education. That is not only bizarre, it’s insulting.

Increasing Energy Consumption

Of course, there are other arguments marshaled by the conservationists for these standards.

More efficient appliances, they say, will reduce energy demand, thus helping to prevent blackouts during hot summer days. It’s estimated electricity demand will drop 1 percent during hot summer days because of these standards.

But if we think reducing demand during hot summer days is worthwhile, wouldn’t it be better simply to ensure that the price of electricity during hot summer days reflects its cost? If regulators were better able to allocate scarce resources than markets do via the pricing mechanism, then socialism never would have collapsed in Eastern Europe.

Moreover, those who estimate energy-efficient air conditioners will cause demand to drop are ignoring fundamental laws of economics. If you reduce the cost of turning up your air conditioner on a summer day (which is exactly what an energy efficient air conditioner does), all things being equal, you will turn up your air conditioner on a summer day more often.

Economists who have studied this dynamic refer to it as “the rebound effect.” They have discovered that energy efficiency standards save money and energy only if you don’t acknowledge that reducing the marginal costs of energy consumption will result in more energy consumption. Once you take that rebound effect into account, much of the advertised energy savings from the tighter standards disappear.

No matter how you cut it, mandatory energy efficiency standards are a bad deal for consumers and the economy as a whole. No amount of Orwellian rhetoric or half-baked economics can change that fact.

Jerry Taylor is director of natural resource studies at the Cato Institute. His email address is [email protected].